Blame It On The Fed – Part II: Inflation

Blame It On The Fed – Part II: Inflation

The biggest surprise of the month, a -1. 4% real GDP print (preliminary) (market consensus was +1. 0%) was greeted with a yawn on Thursday (April 28) because the components pushing down the GDP were not consumer spending issues. The biggest culprit was the balance of trade (imports greater than exports) which subtracted -3. 2 percentage points from the GDP calculation. Inventories and the government sector (federal, state, and local) subtracted -0. 8 and -0. 5 percentage points respectively. But, because real consumer spending rose at a +2. 7% annual rate, markets ignored the negative headline. Besides consumer spending, residential construction rose +2. 4 percentage points, while non-residential was up +9. 2 and capex by +15. 4 percentage points. The equity markets climbed, with the DOW up 1. 9% on the day, S&P 500 by 2. 5% and Nasdaq by 3. 1%. Bond yields reversed their recent downtrend, floating back toward their recent highs. The markets are big believers that the Fed, despite its loathsome track record, is in the process of guiding the economy to a "soft-landing." Over the past 74 years (12 recessions), the number of times a negative GDP print has occurred without an ensuing recession can